Nowhere to hide, maybe

Posted On Friday, 04 June 2004 02:00 Published by eProp Commercial Property News
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Industry conference at last lances the boil of phoney portfolio values


Angelique de RauvilleThe days of property fund managers bumping up property values to hoodwinktheir bosses and investors could soon be over. Prompted by a series ofscandals, as well as the growing influence of industry benchmarker Investment Property Databank (IPD), owners and valuers have decided to clean up theiract.

Opening the second annual IPD valuation conference in Johannesburg lastweek, Colin Wright, MD of sponsor JHI, didn't mince his words. "We at JHIare looking forward to the valuation professionals and the property industryaddressing critical issues affecting local and international credibility,"was his first sentence.

Wright added that there was a "lack of resistance by valuation professionalsto bend the rules to suit circumstances beyond the function of the valuation".One valuer put it more bluntly: "I'm called in by institutional propertyowners and told that either I give them the property values they want orI don't get the business."

But even when valuers are not bullied by property owners, they are stillforced to charge cut-rate fees to get business and then produce inferiorvaluations. He says they are also "unduly influenced by the opinions ofunqualified and inexperienced commentators". More technically, their methodologiesare inconsistent.

Whether they are the victims of outright fraud or honest error, foryears investors have been buying into properties that are not what theyseem. RMB Properties MD Warren Schultze told the conference that propertiesat Momentum Life were 30% overvalued when RMB took them over a few yearsago.

These overvaluations distort the performance of pension funds and policyholderfunds. And this is often for the banal purpose of making a portfolio manager'sperformance look good to his boss and peers.

A big gap in SA corporate governance rules is that these institutionsare not forced to disclose full details of the properties they buy andmanage for their policyholders. So institutional managers can - and stilldo - overvalue their portfolios with impunity. This can have bizarre consequences.

For instance, the notional rental for the empty space in the latestvaluation of a building may be R60/m², though the market rent is onlyR45/m². If the manager signs up a tenant, the building value willfall. So he leaves it empty and deprives his pensioners or policyholdersof income.

Or he doesn't sell the building when he can. "We offered one of thebig institutions R8m for a building the other day," says the manager ofone listed fund. "They agreed with our value but said they could sell itonly if they got their book value of R17m."

But Old Mutual (OM) valuation manager Trevor King, a speaker at theconference, says that has changed, at least with OM's R8bn property portfolio."One-third of our portfolio is valued externally each year," he says. Andbecause OM does valuations for outside properties such as the V&A Waterfront,it is able to compare its own properties.

"Our values are submitted to OM unfettered by anyone in OM Properties,"says King. "Our policy does not permit anyone to influence our independence.I'm satisfied our valuations are as good as they get, and you can see thatfrom the number of properties we're selling at more than our valuations.

"With IPD's benchmarking, you can't be an outlier and there is nowhereto hide," he adds. "Also, our portfolio's valuations are on the medianof the IPD results." (The IPD portfolio represents 70% of SA's institutionaland listed property. IPD has been headed since inception in 1997 by StanGarrun.)

This may be true, but even insiders are still dubious. "I think thereis still overvaluation and I'm sure OM management still has enormous powerover their valuers," says one analyst.

Adds an agent: "You have only to look at the values on their list ofproperties for sale."

But King says that is probably part of the negotiating technique ofOM's marketing people.

Sanlam property asset management's senior financial manager Ralph Wellhonerpoints out that the large insurers started benchmarking through Sapix,which became IPD. Liberty Properties remains aloof from IPD.

Institutional portfolios remain opaque, but listed property funds faceintense scrutiny. This has led to major overvaluation scandals for Bonatla,Fairvest and Arnold Property - a healthy sign.

"We are definitely making progress," says Angelique de Rauville, MD of Provest, which invests in listed property. "But we still have some wayto go."

However, even the best valuers can come up with different figures onthe same property, and the industry does not have a uniform methodology.

Most of the conference was taken up in discussing what was the bestvaluation method: discounted cash flow, which works mainly on projectedincome on the property; or market capitalisation, which places more emphasison the initial yield of the property.

Valuers prefer the discounted cash flow method and software developerDeon Keet claims his system, MDA Property Analyst, caused a 25% write-downof Arnold Property's portfolio. Trouble is, property investors almost universallyuse the market cap method, as do many overseas valuers (see table).

That's not good enough for OM's King. "We are the valuation experts,"he told the conference. "So we must lead the market." But that isn't happening yet.

Last modified on Tuesday, 13 May 2014 12:06

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